How a VC Firm Makes Money - Accel and Facebook Case Study - Part 1 of 4

Background information:

Accel Partners is a private equity and venture capital firm. It invests in many industries such as Computing, Consumer Internet, and Energy (here are some other industries).

Incredibly, Accel has invested in about 200 companies. It is based in Palo Alto, California and it also has offices in London, China and India. It was created in 1984, and they have invested in many familiar companies, such as Real Networks, Facebook, Veritas, Comscore, BitTorrent and Macromedia (the creator of Dreamweaver, Flash, etc.)

Also incredibly, in 2008, Accel was able to raise almost $1 billion dollars, despite the Global economic downturn.

Read more about Accel here

Facebook requires no introduction. The social networking company was created by Mark Zuckerberg and a few of his Harvard classmates in 2003.

You can read more about Facebook here.

Now we are ready to visualize how a VC firm can make money. This is part 1 of 4 posts.

According to the Financials section of Facebook’s Wikipedia page, you read that:

“Facebook received its first investment of US$500,000 in June 2004 from PayPal co-founder Peter Thiel.[25] This was followed a year later by $12.7 million in venture capital from Accel Partners, and then $27.5 million more from Greylock Partners.[25][26] A leaked cash flow statement showed that during the 2005 fiscal year, Facebook had a net loss of $3.63 million.”

We are not going to focus on the net loss at this time.

Searching a little bit the Internet, we get:

From The New York Times, Facebook and Venture Capital Firms:

“Among venture capitalists it’s a poorly kept secret that Facebook’s valuation came in just shy of $100 million. Assuming that’s true (Mr. Breyer declined to say), Accel paid a little more than $12 million for roughly a 15 percent share.”

As you can see, Accel very likely paid $12M for 15% of Facebook that time. That’s almost the same deal Accel struck with Microsoft.

“And back in 2006, social-network valuations sky-rocketed accordingly. There was the $800 million acquisition offer from Yahoo that Facebook reportedly rejected, the $2 billion Facebook wanted and the $25 million in venture capital Facebook got from Greylock Partners in April. In September, RBC Capital markets analyst Jordan Rohan said MySpace might be worth $15 billion in three years. The same month, Google bought video-sharing site YouTube, with is social features such as profiles and friends lists, for $1.6 billion.”

Here’s what’s so impressive about this deal.. Big companies, such as Yahoo!, were buying social networks for about $500 - $800 million at that time. This means that the value of social network sites were in this range price. Jordan (from RBC Capital) comments “MySpace might be worth $15 billion in three years”. He missed it—it was Facebook, not MySpace, that would be valued at $15 billion in less than 3 years.

Venture Beat - Facebook and VC firms

“It has never been our intention to sell the company,” said Melanie Deitch, Facebook’s director of marketing, adding that the latest funding puts the rumors of such a sale to rest. Late last month, Business Week reported the company had turned down a buyout offer for $750 million and was looking for as much as $2 billion, citing analysts saying that Viacom, owner of MTV, might make a good match.
David Sze, the venture capitalist who led the investment for Greylock, said earlier statistics from comScore showing a decline in unique visitors in February were an aberration, and that the company’s internal statistics show continued robust growth. Indeed, the March statistics showed resumed growth on this metric too.”

As you can see, big companies were trying to buy Facebook for somewhere in the range of $750 million. The statistics from comScore in the second paragraph are especially interesting. It’s not the first time that comScore has misreported numbers about visitors for a website. Sometimes, companies spread misleading news to push negotiations in their favours. It didn’t work out that way in this case.

WebProNews - Facebook and VC firms

“Venture capital funding provided by Greylock Partners and other firms totaling $25 million placed a value of $525 million on Facebook, which reportedly turned down $750 million from Viacom.”

Greylock Partners and other firms valued the company at $525 million! This number is important to establish the pre-money and post-money valuation. With this info, we are able to estimate the approximate percentage of the company’s equity being sold. - Facebook and VC firms

“New York-based News Corp., whose far-flung media properties include Fox Broadcasting and 20th Century Fox, spent $3.5 million for an undisclosed stake in Mountain View, Calif.-based SimplyHired. It bought last year for $580 million.”

So, in 2005, Fox bought MySpace for $580 million. Again, this reinforces the probable value range ($400M - $800 M) of a famous social networking site.

Peter Thiel invested US$500,000 in Facebook, Accel Partners invested $12.7 million,, and Greylock Partners invested $27.5 million.

I show you how to calculate what  percentage that Greylock Partners got for $27.5 million in the next posts.

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